TDS & TCS Overview

When a business pays a contractor, a professional or a landlord, it often has to keep back part of the payment as income tax and pay it to the government on the payee's behalf. This is TDS (tax deducted at source). On some sales, the seller must collect extra tax from the buyer; this is TCS (tax collected at source). Both are income-tax concepts, separate from GST.

This lesson gives you the ideas, the accounting entries and the TallyPrime setup at an overview level. TDS and TCS have many sections, rates, limits and exceptions, and the law changed on 1 April 2026, so this is the one area where you should never rely on a tutorial for numbers.

TDS in plain words

The payer (deductor) deducts tax from certain payments, deposits it with the government, files a quarterly TDS statement, and gives the payee a certificate. The payee (deductee) receives the net amount and claims credit for the tax deducted when filing their own income-tax return.

Bill from contractor: 50,000
    payer deducts TDS (example rate)          ->  500
    payer pays the contractor                 ->  49,500
    payer deposits TDS with the government    ->  500   (by the due date)
    payer files the quarterly TDS statement and issues a certificate
    contractor claims credit for 500 in their own return

Payments that commonly attract TDS include salaries, payments to contractors, professional and technical fees, rent above a limit, commission and interest. Each has its own conditions. A deductor needs a TAN (Tax Deduction and Collection Account Number).

TCS in plain words

With TCS, the seller collects an extra amount of tax from the buyer on certain specified transactions, deposits it with the government and files a TCS statement; the buyer claims credit. Which transactions attract TCS is set by the law and changes from time to time.

Do not confuse income-tax TCS with GST TCS, which is collected by e-commerce operators (online marketplaces) from sellers' payouts under the GST law. They are different taxes with different returns.

The law changed on 1 April 2026

The Income-tax Act, 2025 came into force on 1 April 2026 and replaced the Income-tax Act, 1961. For TDS and TCS this mainly brought:

• New section numbers (the TDS and TCS provisions are consolidated into a few sections) and the term tax year instead of "previous year" and "assessment year".
• New forms. The TallyPrime 7.2 release notes list support for Form 138 (salary TDS return) and Forms 140, 143 and 144 (non-salary TDS and TCS returns).
• A transition rule from the Income Tax Department: amounts paid or credited up to 31 March 2026 stay under the 1961 Act, and those on or after 1 April 2026 fall under the 2025 Act.

Older textbooks and many websites still quote 1961 Act section numbers such as 194C or 194J and forms such as 24Q and 26Q. Those apply to earlier periods. For anything from April 2026, use the new references from the official website.

The accounting entries

Using an invented 1% rate on a contractor's bill of ₹50,000 for shop repairs:

=50000 * 1%
=50000 - 500

500      TDS deducted (example rate)
49500    paid to the contractor

TDS Payable is a liability (under Duties & Taxes) from the day it is deducted until it is deposited. For TCS the seller's entry is the mirror image: the buyer is debited with the sale value plus TCS, and TCS Payable is credited.

TDS in TallyPrime

1. Enable it: F11 > Enable Tax Deducted at Source (TDS) = Yes, and fill in the deductor details (TAN, deductor type and the person responsible). TCS has its own option, Enable Tax Collected at Source (TCS), under Show more features.

2. Masters:

3. Vouchers: in the journal or purchase voucher, select the expense, then the party and the TDS ledger; TallyPrime calculates the TDS from the nature of payment, the party's details and any threshold. To deposit the tax, use a Payment voucher and press Ctrl+F (Autofill) for the statutory payment, which fills in the TDS due for the period.

4. Returns: TallyPrime's TDS reports show the deductions, payments and the data for the quarterly statement, which is validated with the official File Validation Utility before filing. Release 7.2 supports the new forms listed above.

Common mistakes

• Using old section numbers for new payments. Payments from 1 April 2026 fall under the Income-tax Act, 2025.
• Recording the full bill as payable to the party. The party gets the net amount; the TDS is a separate liability.
• Forgetting to deposit. Deducting without depositing on time attracts interest and penalties.
• Copying rates from websites. Rates and thresholds depend on the section, the payee and the date; check the official source every time.

Key points

• TDS: the payer deducts tax from certain payments and deposits it; the payee claims credit.
• TCS: the seller collects tax from the buyer on specified transactions and deposits it.
• From 1 April 2026 the Income-tax Act, 2025 applies, with new sections and forms; earlier amounts stay under the 1961 Act.
• Entries: expense Dr, party Cr (net), TDS Payable Cr; then pay the party and deposit the TDS.
• TallyPrime handles TDS and TCS after F11 setup, with nature of payment, party details and tax ledgers.

=30000 * 2%
=30000 - 600

600      TDS deducted (invented rate)
29400    paid to the consultant